Kho Inc. purchased 90% of the voting shares of Lan Inc. for $600,000 on January 1, 2019. On that date, Lan's common shares and retained earnings were valued at $200,000 and $250,000 respectively. Unless otherwise stated, assume that Kho uses the cost method to account for its investment in Lan Inc.

Lan's fair values approximated its carrying values with the following exceptions:

Lan's trademark had a fair value which was $50,000 higher than its carrying value.

Lan's bonds payable had a fair value which was $20,000 higher than their carrying value.

The trademark had a useful life of exactly ten years remaining from the date of acquisition. The bonds payable mature on January 1, 2029. Both companies use straight line amortization exclusively.

The financial statements of both companies for the year ended December 31, 2020 are shown below:

The financial statements of both companies for the year ended December 31, 2020 are shown below:

Income Statements

	Kho Inc.	Lan Inc.
Sales	$700,000	$640,000
Other Revenues	$300,000	$160,000
Less: Expenses:
Cost of Goods Sold	$280,000	$256,000
Depreciation Expense	$30,000	$14,000
Other Expenses	$240,000	$155,000
Income Tax Expense	$90,000	$75,000
Net Income	$360,000	$300,000

Retained Earnings Statements

	Kho   Inc .	Lan Inc .
Balance, January 1, 2020	$200,000	$100,000
Net Income	$360,000	$300,000
Less: Dividends	($60,000)	($50,000)
Retained Earnings, Dec 31, 2020	$500,000	$350,000
Balance Sheets
	Kho   Inc .	Lan Inc .
Cash	$200,000	$150,000
Accounts Receivable	$50,000	$150,000
Inventory	$50,000	$150,000
Investment in Lan Inc.	$600,000
Equipment (net)	$500,000	$150,000
Trademark		$200,000
Total Assets	$1,400,000	$800,000
Current Liabilities	$280,000	$150,000
Bonds Payable	$120,000	$100,000
Common Shares	$500,000	$200,000
Retained Earnings	$500,000	$350,000
Total Liabilities and Equity	$1,400,000	$800,000

Other Information:

A goodwill impairment test conducted during August 2020 revealed that the Lan's Goodwill amount on the date of acquisition had been impaired by $10,000.

During 2019, Kho sold $50,000 worth of inventory to Lan, half of which was sold to outsiders during the year. During 2020, Kho sold inventory to Lan for $90,000. Two-thirds of this inventory was resold by Lan to outside parties.

During 2019, Lan sold $30,000 worth of inventory to Kho, 80% of which was sold to outsiders during the year. During 2020, Lan sold inventory to Kho for $40,000. 75% of this inventory was resold by Kho to outside parties. As of December 31, 2020, Kho still owes $20,000 to Lan for the inventory.

All intercompany sales as well as sales to outsiders earn a gross margin on sales of 20%. The effective tax rate for both companies is 20%.

Since Kho acquired Lan, Kho has charged Lan an annual management fee of $30,000. Lan has paid Kho for the management services on December 31 ^st of each year.

Ignoring taxes, what is the total amount of unrealized profits in inventory at the end of 2020?

Answer rating: 100% (QA)

The total amount of unrealized profit can be calculated by mult... View the full answer